Why Free Plans Don’t Work

If you're trying to grow your startup you've come to the right place. Get my 170-page ebook on how to grow a startup and join thousands of self-funded entrepreneurs by subscribing to my newsletter at right.

Not too long ago it seemed like every product I knew was offering some sort of free plan. The strategy was brilliant: get loads of people using your product and eventually turn them into paying customers. Everywhere I looked there were stories of people making money hand over fist with this approach.

“For us, Writeboard and Ta-da list are completely free apps that we use to get people on the path to using our other products. Also, we always offer some sort of free version of all our apps.

We want people to experience the product, the interface, the usefulness of what we’ve built. Once they’re hooked, they’re much more likely to upgrade to one of the paying plans (which allow more projects or pages and gives people access to additional features like file uploading and ssl data encryption).”

So when I launched Bidsketch — a SaaS based proposal application for designers — offering a free plan was a no-brainer in my book. Out of all the important decisions I spent time mulling over before my launch, I gave this one the least thought.

Early on, things were working out nicely. In the first few days of my launch I had morepeople sign up for the paid plan than the free plan.

“Man, this free plan is really working out,” I thought. Here is a look at the numbers:

In any case, I was still happy with the results a week later, once I started converting general website traffic:

While the numbers looked good I knew they wouldn’t last because I was relying on a limited time offer. I just didn’t realize how much worse things would get:

For the next month only 1% of users would choose the paid option. My user base was growing fast but the money was barely trickling in. Also, support was starting to get tricky, which left me uncomfortable at the thought of what things would look like six months down the line.

How many of the free accounts was I able to upgrade to paid? I didn’t fare any better upselling users: 0.8% of free user accounts eventually upgraded to paid.

When things started going south, I figured I was to blame for this. I simply wasn’t carving out the right features. Or maybe I wasn’t prompting for upgrades at the right places.

I tried all sorts of tactics to convert my free users:

More upgrade prompts

Less features on free accounts

Premium features for 15 days

More emails aimed at upselling users to paid

None of these changes had a significant impact. The only thing that seemed to be consistent about my growth was that my revenue was relatively flat while my user base kept growing.

If I stayed on this path, I’d soon have thousands of free users to support.

So in a desperate attempt to get things moving in the right direction, I experimented for a week by killing my free plan. I didn’t tell anyone that I was getting rid of my free plan, I simply deleted it from my pricing page.

My major concern was that I’d keep the same number of paid users coming in and I’d lose all the free ones. Which means I wouldn’t have a targeted list of users to try to upsell to a paid plan. Not that I was having much success getting them to upgrade, but at least it was something.

Things didn’t quite turn out that way. This change that took all of five minutes to make, led to an 8x increase in paid conversions.

Look at that again. That’s not 8%. That’s 800%.

I felt comfortable enough with the results to try it out for the entire month. Amazingly, this resulted in a 10x increase in paid conversions for the month.

And I’m not the only oneIt wasn’t long after I got rid of my free plan that I started to notice that a lot of people were citing similar issues with having a free plan.

“… The majority of the revenues for our products come from people who sign up for the paid versions upfront. So we definitely have people upgrading from free to paid, but the majority of people who are on pay started on pay… of course, more people are going to pick the free version and stay on the free version, but if you’re looking to get paying customers, ask for money upfront and you’ll have a lot better shot of getting them.”

Pandora started out with less than 1% of their user base as paid subscribers. Once they focused on delivering a better premium offering they were able to increase that to 1.7%. Still, pretty underwhelming unless you’ve got 20 million people using your service like they do.

Evernote is looking at a 0.5% conversion rate to paid accounts initially and can convert 2% of the people that stick around for a year.

While there wasn’t a specific conversion rate published for MailChimp, they did mention the negative side effect of abuse-related issues:

“But the biggest bumps of all? A 354 percent increase in abuse-related issues like spamming, followed by a 245 percent increase in legal costs dealing people trying to game the system.”

Holy crap. Where was this info when I needed it?

CrazyEgg decided to drop its free plan in Jan of 2009 and they haven’t looked back. I asked CrazyEgg co-founder Hiten Shah why they decided to drop their free plan back then. “We thought that if we dropped it we would make more money,” said Hiten. This turned out to be a good move since it doubled their revenue that month.

LessAccounting co-founder Allan Branch said while they don’t claim to know what the best approach is in regards to a free plan, they haven’t seen a good reason to change what they’re doing now. With them, users have to sign up to a paid plan trial, and will get dropped to a free plan if they don’t enter payment information at the end of the trial. Obviously, this approach of making users choose a paid plan at signup has worked well for them so far.

An Example We Can Relate ToA lot of us aren’t at the same level that these guys are; we’re not dealing with millions of users, or even hundreds of thousands. So an example like Pluggio might be easier to relate to.

Pluggio is a Freemium Twitter web app created by Justin Vincent. He has a great stats page that shows everything from monthly revenue to the breakdown of users by plan type.

Taking a look at that page reveals that he’s actually doing very well for a relatively young app in this space.

He’s been averaging about a thousand dollars a month since November of last year. And unlike the bigger guys, his paid users make up 2.5% of all accounts. That’s damn good for any sort of Freemium app judging by the numbers that we’ve seen so far.

I spoke with Justin to ask him about his experience with the Freemium model. He seemed to be doing well with Pluggio which is why I was surprised when he told me he was seriously considering killing his free plan.

His reason for doing this? Revenue has been relatively flat and the number of users has been steadily increasing over the last few months (currently nearing five thousand).

This says a lot about the pitfalls of having a free plan for entrepreneurs with limited resources.

Do they ever make sense?I’m not saying that it’s impossible to be successful if you launch with a free plan.

Obviously free plans have worked well for companies like Wufoo, MailChimp, and FreshBooks, so we know they can work. But the problem is that we’re not them.

I’ll concede that there are certain types of apps that are more likely to succeed by offering a free plan and going with the Freemium model. But the vast majority of apps aren’t in this category, and the vast majority of people don’t have the resources to make that model work.

Taking advantage of word-of-mouth marketing requires more users than most of us will attain. Instead, we end up with a large number of free users zapping away valuable resources for nothing in return. To top it off, most free users will never end up converting to a paid plan.

If we have thousands of users that don’t increase awareness and will never pay for our product, why do we insist in offering something that’s going to hurt our business? Maybe we should just skip that free plan and focus on making money instead.

About the AuthorRuben Gamez is the founder of Bidsketch, web based proposal software for designers. When he’s not developing software, he’s furiously working towards becoming a better Micropreneur.

A 170-page ebook collecting my best startup articles from the past 5 years

Previously unpublished startup-related screencasts

Exclusive revenue-growing techniques I don't publish on this blog

"The ideas and information Rob provides should be required reading for anyone that wants to create a successful business on the web." ~ Jeff Lewis

Startups for the Rest of Us...
If you're trying to grow your startup you've come to the right place.
I'm a serial web entrepreneur here to share what I've learned in my 11 years as a self-funded startup founder.
Luckily several thousand people have decided to stick around and join the conversation.

I agree with the point by Reader X that the Free/Premium model is a marketing strategy. But a more important question to which I don’t have a good answer is whether the Free/Premium strategy leads to better or worse product development. If you offer a product for free you get more users and more feedback on your product. But is it the right data? Do paid and free customers have very different needs/priorities? If they do then the free offering is a mistake even in terms of product development. Does anyone (particularly the author of this article) have any thoughts on this matter?

Freemium can be a great way to attract lots of users – especially if you have $10 million in VC money to survive on (and pay for the fun).

If not, getting a lot of users who are not willing to pay and still expect free support as well, is very demanding and may affect the service you’re able to provide to your *real* users (who are paying).

We tried offering a free edition, but decided that it wasn’t worth it (so we killed it) – because providing quality support is expensive !

I think support and other ancillary costs are key here. Free accounts are only beneficial if they bring in more revenue than they consume over some predefined timescale (duh!).

Freely supporting a horde of freeloaders is simply stupid. Common sense leads you to expect that the freeloaders are unlikely ever to convert, they just move to the next free thing or they are looking for free resources to exploit.

So if you can’t immediately profit from freeloaders (think gmail and advertising) don’t invite them in at all.

@ReaderX – The problem is that trying to get that critical mass in buzz by offering a free plan often results in a large number of users to support without doing much to achieve its original intent.

@Paul – Thanks! While plenty of advertising systems work on 0.8%, this simply requires more traffic than most non-funded products are able to achieve by offering a free plan. Charging money upfront works pretty well I’ve found.

@Al – I recognize that some users may be turned off by the amount of friction I have during my signup process but I find that most don’t mind and it works well to filter out people that aren’t serious about buying. I may experiment without that requirement later but I’m pretty happy with it right now.

@Ben K – Great question Ben. I’ve found that free users have different priorities when it comes to enhancements. From my experience with Bidsketch, free users seem to be more concerned with getting my product to do more (invoicing, crm, etc.) while the paid ones want features focused its core competency and more integration options.

@Atle – Exactly. The effect on the level of support that paid users receive is too much of a downside in my opinion.

Indeed one of the most applicable statements of your well done post is when you say:

“We need to stop blindly copying them and start thinking about ways to bring in revenue.”

Yes, we can learn a lot from others successes and failures, this is very valuable, but it is critical to keep in mind that you are not them and the many conditions and variables that generated their results are far from likely to apply to your business (the way you hope they will).

Great article- I love it when people reveal their figures- it takes bravery and well done to you.

I think people think freemium works as a rule as opposed to the reality that it’s the exception- mostly driven by glamorous web 2.0 types. Business software is different and shouldn’t be treated in the same way as B2C.

@lincolnmurphy is probably the expert on Freemium in SaaS and he wrote a brilliant white paper on the subject- you should check it out!

Ruben, This was a pleasure to read! I am going through converting our product from free to paid and am less and less in favor of freemium models. 1-2% conversion is what I hear from a lot of people. This means that your user base has to be enormous to draw significant revenue. Also, if you are offering a product to businesses/prosumers, why not opt for the age old model – I give you value, you give me money?

Would love to hear your opinion on what type of products freemium is the best choice.

Ruben, thanks for one of the most refreshing level-headed piece of writing I have read in a long time. Proponents of the freemium model need to take into account the negative Life Time Value (LTV) of free users when touting free as an efficient marketing strategy.

If you are looking to build a profitable business, freemium may be the worst model for you. If you are looking to sell a money-sink to BigCo on the basis of millions of “eyeballs”, yayy go for it!

This is a great article. I think most first-time entrepreneurs have an assumption that offering a free plan will help increase their revenue and your experience disproves that.

Another option to consider is to provide a very cheap plan and a “regular” plan. There are a few freemium products that I use that I consider valuable, but I am careful not to upgrade because the cheapest paid offering is not cheap enough for the value it provides me. I would be much happier paying a very low fee with all of the free offerings or maybe a little bit more, than having a large monthly bill.

For example, I’ve used Acunote for bug tracking, and they do have a free offering that I use, but the next step up is $50. They are valuable to me and for that I’d be willing to pay a certain amount, but not that much. So if they dropped their free plan, or reduce the feature set so that it’s not useful to me, I’d just switch to another service.

@Chris – Well said. Those conditions and variables you mention are much tougher to identify than most people think.

@Eugene – The 1-2% figure you hear is very much inline with what I’ve found also. Regarding the best type of products for freemium: I would’ve guessed that products like Pluggio (social media apps) would fit the bill here since most people expect them to be free. But after my conversation with Justin I’m not so sure about that.

“I avoid any business that tries to trick me into giving them money. This absolutely applies to a “free trial” that requires me to come back and explicitly cancel the service in order to avoid charges.

Rob, frankly I’m surprised you’re endorsing this business model.”

Hmm…the word “trick” feels a bit dramatic here. Most businesses do this (car rental, hotels, etc…) to ensure you have the ability to pay. Asking for the credit card up front is a good way to vet customers. Without this step you wind up with tons of people signing up for the trial who have no means or intention to pay.

Rather than waste precious resources supporting them you are vetting users early. This is a key step in the process of narrowing your customer funnel and finding users that are a fit for your service.

The question you have to ask though which is not included in the test is how many new users will the free version bring in a few months down the line by growing the total pie from word of mouth.

So, yeah, if you are targeting a niche and have a good way to reach them anyway the above can be ignored. But if it is a mass market app then freemium might make sense, but it would be difficult or impossible to test it.

Over time, how long will the new users stick around? and how many will eventually convert? How old are the converts? So, if 1% convert each month does that mean that each month a free user sticks around he has a 1% chance to convert to paid? You see where I’m going here. With one hundred new users you get one paid user each month for how long?

@Amber – “So if they dropped their free plan, or reduce the feature set so that it’s not useful to me, I’d just switch to another service.” That’s a good point for having an entry level plan that most people can afford. It’s pretty strange to go from free to $50. So the paid version is worth that much more than the free?

@Elisha – FreshBooks co-founder Mike McDermott talked about that before. He said was giving a talk on cohort analysis for Freemium products and he indicated that there’s a huge drop off in upgrades by the second month. They still happen but churn is more likely going to thin that down so that it’s not as significant.

It seems to me the best way to make freemium work is to target those who are likely to be in a better position in the future. In reality you are only aiming to sell to the business users who really need it and can claim it as expenses. The people who you wish to give it free should be those who are destined to be business users but may not know that your product is the one they will need. Get them hooked while they can’t afford it and then when they can afford it make them pay.

i do believe it depends on your business model. if your model requires a “network effect” to get to where you’re product is useful — foursquare, multiplayer games, sharing apps in general — then freemium if for sure the way to go.

if you’re just offering a product for sale? meh. as long as there’s some sort of try-before-you-buy, i think you can safely leave a fully-supported free version off the business plan.

The whole discussion kind of misses the point. The freemium model is trading revenue for marketing. Once a company gets to be a certain size, for example 37 Signals, they no longer need that free marketing. For people that don’t have well read blogs or thousands of followers on twitter that free advertising that comes from a product with a low barrier to entry is worth it. Like all marketing decisions it needs to be reevaluated on a regular basis.

@Harry – The problem with that approach is that it takes resources — which most startups don’t have — to support a large (free) user base without impacting the paid ones.

@Sam – “The freemium model is trading revenue for marketing.”

Most people understand that trade-off and go into a free plan with this intent. The reality is that the numbers needed to make a free plan effective from a marketing standpoint are much larger than what most non-funded startups are able to achieve.

The cost of support for free things is the big problem. By cost I mean mostly the cost of the time and attention. If a program is free and popular the support can take a lot of your time from the sheer volume. I have an app that is basically a giveaway, but instead of giving it away free I ask people to send something they made in, in return for it. It could be a poem, drawing, whatever. This enables the program to get out and be used, and the actual cost to customers is not a lot, just some stamps and time to stick something in an envelope, plus their own time to make something, which is the true value of the exchange. In return for which they get support and updates. This reduces the number of customers and time cost of support. If it was free, the cost of support would be high enough I’d have to hire someone to handle support just for that app, and that cost would have to come from something else.

Ah yes, the perils of the ‘warm puppy’ close. This is something traditional marketers have known for years: it’s much easier to persuade someone to keep with the status quo than to get them to make a painful decision – in this case, to part with their money. But if they have already parted with it, they’re much more likely to ride out the sale.

@Ruben – Generalizing is not how people should make marketing plans. Some startups can easily absorb the cost but either way they need to understand what the costs are instead of blindly going either way. Part of any good marketing plan is customer acquisition costs and knowing when those costs are too high. Instead of saying you should do freemium or you shouldn’t it should be – you should evaluate what freemium will cost and decide if those costs outweigh the benefits. And like any good marketing plan you should reevaluate as needed. Which is exactly what you did. But that should be the real take away. You might not have grown to your current size without those early freeloaders.

Great Article I read the full thing without skimming so you kept my attention.

Perhaps another solution that may or may not work depending on your web application is to have either a general free trial that everyone logs into to test out the features with no sign up necessary. Bandwidth is still used but less storage resources, etc.

Another solution might be to just give them a free trial for 30 days and cancel and delete the account if they don’t become paying customers. Again, it depends on the type of solution you are offering as this may not be possible in your niche.

Agreed, but it happens all the time. Think of my post as a commentary against the generalization that offering a free plan means marketing success. Hopefully looking at real numbers will help others think things through in a way that I didn’t do initially.

@Branden – Those two suggestions are something I may test out at a later date. It would be interesting to see how things change.

Thanks Ruben – great insight. There must be something in the air as I just put a blog post together on the same thing on Tuesday without even knowing you would write this also! I completely agree with everything you say.

Also, I think your pricing is well balanced and I like the cheaper entry level (instead of free) that you offer ($9). That’s affordable to most who are interested in your product.

Asking for credit card details upfront is wise also.

I think the other key is that most of these guys give away too much in their free plans that we never need to upgrade to keep enjoying and getting value out of their product.

The pricing points need to be such that users are dying to upgrade. Usually 50% more the price for 100%-150% more features or value.

I run a fairly successful (tens of thousands of users, profitable, no VC, multiple employees) freemium business, and I’d like to offer some observations (anonymously, in case I say anything to offend our users.). Some lessons we have learned over the years:

0) Industry standard expectations of free->paid freemium businesses are somewhere in the 3%-5% range, plus or minus based on specifics. Your model should be able to support these economics, or you should not do freemium.

1) Freemium absolutely trades time for marketing. Converting free users to paid is a nice bonus on top. But we have more time than cash, so we can spend our time supporting free (and paying) users. If we didn’t do this, we would likely end up spending hard cash to market our business.

2) Corollary: supporting free users sucks. But so does supporting paying users. The only thing that sucks worse is being a user of our software when it’s broken. So the #1 way we reduce our support burden is….to fix our software. Nobody really ever wants to file a support ticket anyway. Just make it work, and the support burden drops like magic. It’s also 100% legitimate to charge for support (through upgrades), as long as your product basically works. Bonus tip: better documentation and usability count as bug fixes for software.

3) The free plan shouldn’t be generally usable by businesses, if you are targeting businesses with your app. Make the restrictions tight enough that it would suck to use the free version at work. But if your product is e.g. Bidsketch, why not have a free version that would satisfy the needs of college students (1 user, 2 clients, etc.)? You want them to use Bidsketch when they get serious about freelancing, or start firms!

4) Corollary: You really have to do some business analysis on the plans BEFORE you publish them. If you plan to launch with 2 plans, you should sketch out 4-5 plans. Include differentiators in your plan, even if you’re not sure you will ever build them. This lets you make sure you’re not giving too much away in any tier. Should you even be bundling into plans, or should you meter by users or MB or proposals sent or whatever? Again, this is basic business planning/sketching. (I know yuck, but you wouldn’t build a website without sketching it first, would you?)

5) Sometimes the market is just telling you that what you’ve built isn’t worth very much for some reason. Maybe the pain you’re attacking isn’t large enough, or maybe your product isn’t quite there yet. If you’re targeting business users, and your largest plan is well under $100/mo, you are probably not adding enough value. Sit down, evaluate whether you can be more successful by going deeper or broader in this market (or does the market just suck?). Do you need to differentiate more? What are the top 5 feature requests from your users? Can you charge for that stuff?

Finally, the “you’re not them” meme in this thread is disheartening. 37signals wasn’t “them” until they grew into a success. If you aim low, you’ll end up with poor results.

@AX – Thanks for the well thought out comment. I won’t speak to every item you brought up but only two that I think are the most important to address:

“Industry standard expectations of free->paid freemium businesses are somewhere in the 3%-5% range, plus or minus based on specifics”

That’s not what most publicly available numbers show, and what most people I’ve talked to about it have cited. Not to say that there aren’t any within that range, just that there seems to be an overwhelming number of startups performing well bellow that range. Even if I was able to get to 3%, that would mean that I’d need 10,000 free users to have 300 that pay. I prefer to charge money right now and get to that number much faster with less overhead (and zero money spent on marketing).

“Finally, the “you’re not them” meme in this thread is disheartening. 37signals wasn’t “them” until they grew into a success. If you aim low, you’ll end up with poor results.”

37signals was “them” when they launched their first product. They had a huge following at that time — something that’s lacking from most startups that attempt to copy what they do without taking into account all the factors involved in their success.

Also, note that my “you’re not them” comment didn’t have anything to do with the level of success someone should aim for. By all means, aim to be as successful as 37signals, just don’t expect to get there by simply copying what they do.

re: conversion numbers, search for pitch decks and VC presentations about freemium. I can remember a number of sources for similar numbers (they may be higher for B2B). But remember also that converting free to paid should be a bonus. You obviously want to set the free plan so that the paid plans are a better fit for many users and not an upgrade down the line.

Obviously, if you can scale your business without freemium and no marketing, more power to you. But very few businesses can do that, even fewer than the number that can make freemium work. After all, you can’t sell unless people know about your product!

Back to this scale thing. I’ll just come out and say it: 10,000 users is not a lot, and neither is 300 paid accounts. Those are hobbyist numbers, but you’re probably not going to be making a living at your business with numbers like those. You’re right that you may be able to get 300 accounts without marketing, but if you want to get to any kind of scale — 30k accounts, say — you may need to do things differently. For instance, if it will take a lot of resources to support 10,000 users on your product, you might want to reconsider it. Such a support burden limits your marketing options (no freemium) and will impact your profitability and lifestyle if you go pay-only. Using 37signals again, they claim millions of users for their products. They have something around 20 employees. Do the math: 10k users don’t take a lot of support, done properly.

Finaly, a correction: 37signals launched their first product (Basecamp) in 2004, before they had a huge following. (They had some following, but then again so does this blog. Both had to scale up.) The Rails 1.0 release came over a year later. So their following probably wasn’t as large as you think at the time. But through freemium of their product and free (Rails), they generated press for their great products (the third key piece) and developed a following. So you may be more like them at that time than you think.

@AX – I think we’ll probably just have to agree to disagree on these topics (especially the support burden).

In any case, I think it’s more useful to cite real numbers. In early 2005 37signals stated they had 10,000 unique readers, so that works out to maybe 40,000 monthly. That’s a much bigger following than most people have.

I think freemium model works well with quotas. When the quota is exceeded you either convert to paid or ditch the service. The pricing reflects how much value the user places in the service which he now understand from having used it for awhile.

Instead, freemium where free version is functionality limited instead shifts the valuation away from the service itself and instead puts a price on just the premium features you’re paying for. This model is easier to mooch off and I think a harder sell to convert to paid customers. Unless the users were given a limited time trial of the premium features they won’t know how to value them.

Requiring credit card information to sign-up for free service is cognitive dissonance and distrusting people will move on.

From a user perspective I really like the freemium model. It allows me to test drive the interface, and determine whether the service will benefit me, or if I could hack it to suit me. Once I have configured everything and established my work flow I would conveniently upgrade to a paid solution.

I believe free helps introduce the brand, but if you cannot get the conversion you are either giving away too much, or do not truly have a product worth paying for, which would be evident by a bunch of inactive free subscriptions.

[…] is one that a lot of entrepreneurs care about (and struggle with). A few people pointed me to a great post by Ruben Gamez of Bidsketch on the Software by Rob blog that talks about freemium plans and why, in Ruben’s […]

I have learned some of what you mention the hard way. The only way “free” has worked for me is when it is time-limited. By offering a fully-featured but time-limited trial, the not-so-subtle message to the customer is “We will give you X days to test drive the full product, and if you are satisfied with it, we expect you to pay for it. We’ve got to eat too!”. This approach allows us to:

1. Extend a hand of trust to the customer (see “Reciprocation”), and
2. Limit the cost/burden of non-paying users to the short trial period. (We certainly have no interest in supporting them “forever”!)

And IMHO, asking for a credit card during a free trial defeats the purpose. Why demand such a bold commitment when the level of trust in the relationship is at its lowest? Demand it later, after you have demonstrated your worth!

I agree. I was being overly dramatic in using “trick” to describe this general approach.

I think @CoreTech captures my sentiment with better language. Divulging my credit card information requires a level of commitment and trust that is excessive for the average anonymous website.

Here’s a pattern I have encountered at sites like BidSketch:
1) Require a credit card during sign up.
2) Automatically start billing me at end of trial period, sometimes without any notice of trial expiring.
3) For “security reasons”, require me to chat with a representative to cancel my service, instead of letting me do that online.
4) Have ridiculously long wait times for service.
5) “Accidentally” not cancel service on first request.

I assume Ruben is ethical and doesn’t engage in the tricks to squeeze out an extra few months of subscription. But why would I take that risk before a site demonstrates any value to me?

I know this isn’t really the point of the post, and I totally understand the need to put a limit on supporting free users. I just feel strongly that asking for a credit card up front is absolutely a mistake for a site like BidSketch. The support demands for a simple site shouldn’t be so high that you need to thoroughly vet your customers before giving them a free trial.

Great read. You have to consider if this model works for your product and as a company. If you have one sole product with a small amount of features then offering a free version is not beneficial at all since your sole source of revenue would be that small percentage of paid users.

Companies like 37signals can afford to offer a free version since their paid versions offer so much more. Whiteboards and Tada lists are free for the home user and a one project Basecamp account will satisfy them as well. However, as soon as a freelancer’s client/project list takes off, 37signals knows they can not function without upgrading to a paid plan.

My sentiments exactly. Sounds to me like fremium worked great as a marketing tool for the majority of examples. They built a user-base to get things going and weed out bugs/ui issues. Now that they’re ‘known,’ they can eliminate that marketing strategy.

@CoreTech, @Al – This is off topic but it’s also interesting: I’ve heard some great arguments for both sides regarding asking for a credit card upfront. I recognize the downsides but it’s important to recognize the benefits of this approach as well. And like Rob mentioned, it’s a very common practice by lots of products out there.

Some other products that do this (off the top of my head):
Basecamp, Highrise, CrazyEgg, UserTesting, FogBugz

Some of the above hide their free plans — the few that have them — so many people don’t even realize it’s a choice. I really don’t know if it would work better for me since I haven’t tested it out yet, but I’m planning to do a direct comparison at some point.

@Blain – Interesting take on it. I initially built a free tool called “Estimate Helper” before I launched Bidsketch to promote my product. I eventually took it offline because it was taking away server resources that I was going to need. I made several mistakes with this free tool that never led to the exposure that I was looking for so I’m hesitant to say whether or not it’s worth the development time and marketing effort (because it should be marketed like a normal product).

Great- you’ve got lots more people paying you no money. Let’s have a look at the numbers: adding 205,000 free subscribers with say 2% converting from free to pay that’s only an increase of circa 5,000 subscribers.

They probably increased their subscribers from 85,000 to 90,000 during that period and their costs increased from 85,000 users to 290,000 users.

Unless those users generated network or ecosystem effects, they’re not going to contribute to an increase in profitability or valuation….

This get’s at the heart of the issue- Why do you want those users, trading use of your software for marketing is not enough!

[…] Very interesting blog post by Rob Walling. Here’s just one example from the post: CrazyEgg decided to drop its free plan in Jan of 2009 and they haven’t looked back. I asked CrazyEgg co-founder Hiten Shah why they decided to drop their free plan back then. “We thought that if we dropped it we would make more money,” said Hiten. This turned out to be a good move since it doubled their revenue that month. […]

[…] Why Free Plans Don’t Work None of these changes had a significant impact. The only thing that seemed to be consistent about my growth was that my revenue was relatively flat while my user base kept growing. […]

I tell ya what, I paid $99 for a keyword domain tool. I would have never shelled that money out if I didn’t have the chance to try it for free for the first seven days. I would have simply passed that tool. But since I got to try it, I really liked it and saw the worth of having it for $99.

These services that have a free model should upfront say that they are only offering it for free for seven days or 30 days. That’s the key. Let people try it free for awhile.

@Justin Re-read my last comment. I’m pretty sure I say that freemium must add value to be successful, even as a marketing tool. I’m just pointing out that value can come in forms beyond conversion like user testing and feedback.

Great post, could not agree more. We are seeing the same pattern on Toshl.com, with almost the same premium % of users. And I could not agree more, unless you really have millions of total customers that do not require software/hardware scaling and support, then you can make a living out of that 1 %. Otherwise, no.

Also, one thing that we find important is reoccurring paying events. We think they are also a huge contributor to potential success of the business plan and one should stay away from one time payments if possible.

Absolutely- I totally understand your point, I just felt it’s importance was underplayed… Freemium is NOT bad if you utilise it correctly- but it should be for network and ecosystem effects and NOT JUST MARKETING.

[…] Why Free Plans Don’t Work If we have thousands of users that don’t increase awareness and will never pay for our product, why do we insist in offering something that’s going to hurt our business? Maybe we should just skip that free plan and focus on making money instead. […]

I’m working on a specialised e-commerce and logistics system (saas model) and I’m thinking about offering a free version to allow people to test the software. For example, after 10 orders, you would need to choose one of the paid versions to continue using the system.

Do you think it’s a good idea (better than freemium with a free plan forever)?

Spot-on post, I think people forget that you have to provide support to all users regardless of whether they are paid or free as you don’t know in advance which of your free users will convert to paid and don’t want to annoy them with crappy support.

I reckon there are more than a few companies out there (Eventbrite perhaps?) who are trying to work out how to pull back from their free use model without damaging their brand. Meanwhile we at EventHQ are growing more slowly but every single user pays for the service.

[…] interesting article from an entrepreneur who went the cookie-cutter freemium route, and eventually backed away from it and saw his revenue shoot upwards. He then explores a few other companies that have gone through […]

>> Do you think it’s a good idea (better than freemium with a free plan forever)?

Unless I’m missing something, it sounds like it’s the same thing to me. Many people offer a perpetually free plan that’s limited in some fashion (limit by usage rather than features in your case). Would a demo or a 30 day trial give them enough of a feel for your app to be able to make the purchasing decision? I would guess so, but every product is different so you’ll want to think through (and test) your approach.

Great post. It seems you researched the free vs paid SaaS memberships very well. I learned the hard way that most free members will never upgrade. But I think every SaaS should provide a free account for a while (I think a month or 2 wont attract enough members to consume a lot of resources) as a way of advertising.

[…] Why Free Plans Don’t Work None of these changes had a significant impact. The only thing that seemed to be consistent about my growth was that my revenue was relatively flat while my user base kept growing. […]

[…] know our history, and they don’t know our motivation. I came across this article recently: Why Free Plans Don’t Work. They actually mention MailChimp in a positive way, but the discussion in the comments show that […]

[…] won’t automatically extend to other web app vendors; indeed, there are many people who don’t think that the freemium model works. MailChimp is a slightly unusual example because it’s an established app that only recently […]

[…] won’t automatically extend to other web app vendors; indeed, there are many people who don’t think that the freemium model works. MailChimp is a slightly unusual example because it’s an established app that only recently made […]

@AX – I read that MailChimp post when it came out and I love their approach to freemium. The whole point of Ben’s post was to say that people conveniently overlook the fact that it took them eight long years of focusing on paid only before they were profitable enough to successfully make the freemium approach work.

This paragraph he wrote is key:
“I think there are too many startups out there who are interested in going freemium because that big “10â€³ number is so attractive. This is dangerous when they don’t even have the “1â€³ yet. How will they pay their bills while they figure out how to “monetize?” Answer: they will need to borrow that money. Does your VC have the patience for the long term, while you try to figure out how to “monetize” and build up that measely “1â€³ number? Answer: No â€” no they don’t. Build up that “1â€³ before you chase the “10.” After you’ve got your “1â€³ all set, use VCs to help you chase after that “10â€³ (if you must). “

Ruben – awesome blog post. Too often we hear all the success stores of freemium, but you are right. I bet for every business model that has success with freemium, there are 10 who tried it and didn’t succeed. The freemium model is very tough to pull off, but if you can do it, the rewards are huge. David Skok has a good post called The Power of Free that everyone should read as well on this topic – http://www.forentrepreneurs.com/business-models/power-of-free/

1) Offer a short free trial. We believe that when they run too long, it encourages people to procastinate in deciding what to do and then gradually they get annoyed at being reminded. If their trial expires, we allow them to re-apply but at least they’re not being nagged when they’re not ready to make a decision.

2) We offer frequent Free Dashboards. Each week, the person gets a useful dashboard so it encourages people to stay in touch. Since it is Excel based, we’re not giving up any intellectual property. People can use the dashboards and populate the data by themselves, or they can save time/money being using our tool. In other words, our FREE offering adds value, but even more value if they have our product.

3) We offer to create a dashboard for people completely free. But in order to claim it, they have to allow us to reference what them in our marketing literature which helps us. This also hurts our competition who make their money doing dashboards for people.

This is our derivative of Freemium and it seems to resonate well with prospects.

Too often we hear all the success stores of freemium, but you are right. I bet for every business model that has success with freemium, there are 10 who tried it and didn’t succeed. The freemium model is very tough to pull off, but if you can do it, the rewards are huge.

It’s a relief that some entrepreneurs are starting to refute the tired mantra that you’re required to give software away for free in order to build a business. I think the “freemium” model is useful (and necessary) in many cases, but its proponents often converniently ignore the need for revenue and cash flow. That’s pretty much why freemium got so out of hand in the first place: internet startups are awash in cash from angels and VCs and don’t need to build a sustainable business model or worry about boring stuff like cash flow and payroll. They just need to grow their user base as fast as possible to increase their valuation at acquisition (or at the next funding round). All this VC cash will not be around much longer, and when it dries up, I think we’ll see a huge move away from freemium and back to the “basics” of cash flow and revenue. It’s kind of hard to earn a living by giving your products away for free…